In debt

California businesses are seeing annual tax increases because the state can’t afford to pay unemployment insurance claims without borrowing from the federal government.

The state has borrowed $8.2 billion from the federal government in recent years to prop up its insolvent unemployment insurance fund. The loans keep jobless benefits coming to hundreds of thousands of laid-off workers, but employers must foot the bill as the state pays down the principal on the federal loans.

This year, the unemployment tax in California is rising by $21 per employee, the third-straight annual increase of that amount.

That means employers will pay up to $539 in unemployment taxes per employee this year, which is $63 more than it was before the state started borrowing.

“Obviously, that’s not going to move the needle on a hire,” said Seth Stein, president of the Mission Valley-based Eastridge Group of staffing companies. “When you think about all the issues facing an employer today, it’s just one of several increases that people are seeing.”

The cost to keep up with jobless benefits has exploded because so many Californians in the past few years have filed for unemployment. But the taxes needed to fund those benefits, 100 percent of which are paid for by employers, are not enough to support the system.

In January 2009, the state saw an influx of unemployment insurance claims, as the jobless rate rose to 9.7 percent and 947,000 people were claiming unemployment benefits in the Great Recession. The state Employment Development Department couldn’t afford all of the weekly payments of $40 to $450 for 26 weeks, so it borrowed from the federal government to pay the benefits.

By the end of 2013, the state will owe $10.2 billion to the federal government for unemployment, at about 2.6 percent interest.

Loree Levy, a spokeswoman for the Employment Development Department, said the system for funding unemployment insurance hasn’t changed since 1984, while the weekly benefits have increased. That’s contributed to what she called a major imbalance at the state unemployment trust fund.

“While the economy is improving and employer contributions are increasing, the fund cannot recover from the deficit under the current model,” Levy said.

California’s seasonally adjusted unemployment rate has fallen from a high of 12.4 percent in October 2010 to a more-than-four-year low of 9 percent in April, but that alone can’t fix the problem. The only solution would be legislative action in Sacramento to change how unemployment insurance is paid for in California, Levy said.

Levy said state Labor and Workforce Development Agency Secretary Marty Morgenstern has identified the shortfall as a serious issue and has held discussions with labor and business leaders. She said the hope is to reach an agreement this year so new legislation can be introduced.

“The goal is to ensure regular UI benefits can continue to be paid, the deficit and the associated loan interest payments are eliminated, and a rainy-day fund is established to avoid slipping back into insolvency in the future,” Levy said.

In 2011 and 2012, California paid roughly $30 billion in unemployment insurance, including federal extensions. That equates to $264 million per week in unemployment checks.

Employers pay unemployment insurance taxes for their employees in the forms of two levies — one state, one federal.

The state unemployment tax is a maximum of 6.2 percent of the first $7,000 an employee is paid — or $434 per employee per year.

The other tax — called the Federal Unemployment Tax Act — is 6 percent on the first $7,000. But because California has its own unemployment insurance system, employers get credited for 5.4 percent of that federal tax. That means they pay a base 0.6 percent on the $7,000, or a max of $42 per employee.

But in 2011, the 5.4 percent credit began to be reduced by 0.3 percent per year, a max of $21 per employee. It will continue to be cut 0.3 percent per year so long as the state is in debt, or until all of the 5.4 percent credit is eliminated in 2029. The credit reductions began two years after the state started borrowing.

“It’s a safety net,” said Steven Gill, an accountancy professor at San Diego State University. “In California’s case, our unemployment tax collections were not great enough to cover the cost of the unemployment program.”

California is one of 22 states that owe the federal government for unemployment insurance. Its credit reduction of 0.9 percent in 2013 matches 14 other states and trails only Indiana and South Carolina, which are down 1.2 percent on the federal tax credit.

In June 2008, Californians became eligible for a series of federal unemployment extensions that brought possible unemployment checks to 99 weeks, up from the base 26 weeks. Those extensions — now topping out at 73 weeks — are expiring Dec. 28. Extension check amounts have been cut by 17 percent due to sequestration — the $1.2 trillion of across-the-board spending cuts over 10 years that began in March.

Additionally, the EDD last week reduced its phone customer service hours to weekdays from 8 a.m. to noon instead of 8 a.m. to 5 p.m. due to a $158 million cut, also from sequestration.